Difference between revisions of "Credit Curve"
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== Definition == | == Definition == | ||
| − | '''Credit Curve''' denotes a ''grouping'' of | + | '''Credit Curve''' denotes a ''grouping'' of different possible [[Credit Risk]] metrics ([[Risk Rarameters]]) that provide quantitative [[Risk Measure | estimates]] capturing possible legal entity [[Credit Event]] over different time periods. |
| − | ( | + | |
| + | == Characteristics == | ||
| + | * A credit curve is a type of [[Term Structure]]. | ||
| + | * It may refer purely to the likelihood of a default or it may incorporate also a loss estimate | ||
| + | * It may be empirical (historical) in nature (expressing statistical likelihood of defaulting over a period of time) or derived from models and/or market data | ||
== Notation == | == Notation == | ||
The credit curve (default curve) at timepoint <math>t_0</math> is the collection of credit default expectation probabilities at the various future timepoints. | The credit curve (default curve) at timepoint <math>t_0</math> is the collection of credit default expectation probabilities at the various future timepoints. | ||
| − | == | + | == Relation with Transition Matrices == |
| − | + | A [[Multi-Period Transition Matrix]] is a collection of square (n x n) matrixes representing the transition probabilities of a stochastic system (e.g. a Markov Chain) over several successive periods. | |
| − | * | + | * In cases where the Credit Event captured by the Credit Curve can be conceptually represented as a [[State Space]] transition a credit curve can be considered as a subset of the corresponding transition rates |
| − | * | + | * A credit curve may capture complext / composite [[Risk Premium | risk premia]] (e.g. [[Expected Credit Loss]]) in which case its relationship with a transition matrix representation may not be well defined |
| + | |||
| + | == See Also == | ||
| + | * [[Tenor]] | ||
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Latest revision as of 11:03, 31 March 2021
Definition
Credit Curve denotes a grouping of different possible Credit Risk metrics (Risk Rarameters) that provide quantitative estimates capturing possible legal entity Credit Event over different time periods.
Characteristics
- A credit curve is a type of Term Structure.
- It may refer purely to the likelihood of a default or it may incorporate also a loss estimate
- It may be empirical (historical) in nature (expressing statistical likelihood of defaulting over a period of time) or derived from models and/or market data
Notation
The credit curve (default curve) at timepoint 
is the collection of credit default expectation probabilities at the various future timepoints.
Relation with Transition Matrices
A Multi-Period Transition Matrix is a collection of square (n x n) matrixes representing the transition probabilities of a stochastic system (e.g. a Markov Chain) over several successive periods.
- In cases where the Credit Event captured by the Credit Curve can be conceptually represented as a State Space transition a credit curve can be considered as a subset of the corresponding transition rates
- A credit curve may capture complext / composite risk premia (e.g. Expected Credit Loss) in which case its relationship with a transition matrix representation may not be well defined
